AMD feels cash crunch, will take on $2 billion in debt

AMD doesn't like its bank account balance and will issue $2 billion in …

AMD is looking for some cash and has decided to take on more debt in an attempt to replenish its bank account. Offered to institutional investors, the Convertible Senior Notes will raise at least $1.97 billion in cash and as much as $2.17 billion, depending on how enthusiastically the institutional investors respond.

AMD will earmark $500 million towards the $2.5 billion loan it took out to purchase ATI. The rest will go towards replenishing its cash reserves and may be used for day-to-day operations, according to the company. Convertible Senior Notes are attractive to investors as it gives them the option of converting them to AMD stock should the company flourish. If the worst-case scenario occurs, and AMD goes bankrupt, then they're first in line for a payment.

The first quarter was a rough one for the chipmaker. AMD followed up its 2006 revenue and market share gains by posting a $600 million loss for the quarter. More alarmingly, it had only $1.2 billion in cash on hand, an amount that is just twice the company's minimal acceptable level.

An ongoing price war with Intel is hurting AMD in the short term, and its first quarter results demonstrate how deeply the price cuts affected its bottom line. Unfortunately for AMD and its investors, it looks like things won't change much in the short term. Two weeks ago, the company announced more price cuts in an attempt to fend off the Core 2 Duo.

There are a couple of bright spots on AMD's horizon, however. In the fall, its quad-core Barcelona part will begin shipping. Early demos of Barcelona have been promising, with AMD's benchmarks showing a 42 percent lead over Intel's quad-core Xeon 5355. Naturally, Intel will have faster Xeons out by that point, but whether that lead will be eroded in its entirety remains to be seen.

AMD is also placing some big bets on its upcoming R600 GPU launch. Slated for launch next month, the R600 will power ATI's initial lineup of DirectX 10 cards. NVIDIA currently has that space all to itself, having launched the G80 (and GeForce 8800-series cards) last November.

Having an extra $1.5 billion in the bank will help AMD's short-term position, but its long-term challenges are still daunting. There is still some significant cost-cutting ahead, including a planned $500 million reduction in capital spending. Capex cuts can be money-savers in the short run, but can also be risky, especially if they result in delayed product launches or fabs coming online later than expected.